Hybrid Life/LTC: The Retirement Reliever

A major league pitcher takes the mound in the first inning, against the first batter.  With a fresh, warmed up arm, he has permission to throw as hard as he can, throw his best curveball, or whatever other pitch can get that batter out.  He is not holding back, just focusing on one batter at a time without regard for lasting the rest of the game.  What allows him to approach the game that way?

Even those who aren’t big fans of baseball know that there is a team of relievers out in right field warming up, ready to step in the moment the starting pitcher’s arm starts to falter.  While a major league pitcher does sometimes last the whole game, it’s typically the optimal strategy to have him start out as strong as possible and relieve him once he starts to tire.

But how differently do you think he’d approach those early innings if he knew he had to last the entire game, even if it went 18 innings, and if he couldn’t, they would forfeit the game?

He would throw a lot lighter and save his arm just in case, delivering a sub-optimal performance well below his potential.

Millions of Americans are under-enjoying their retirements right now because they’re afraid to spend. They’re afraid of what will happen if they outlive their assets. They’re afraid of what will happen if they require expensive ongoing medical care.  Care that can quickly cost hundreds of thousands of dollars and isn’t covered by any medical plan. They’re afraid of what will happen if they need access to significant amounts of cash later in life for unforeseen circumstances. And those with children or strong ties to their community are concerned about the financial legacy they’re leaving behind. The bottom line is, they’re worried about running out of money, and in response they are spending as little as possible, living well below the lifestyle their assets should be able to provide.

Does a Whole Life policy with a Long-Term Care Rider make sense?

We know that whole life insurance provides a guaranteed income-tax free legacy, with guaranteed, accessible cash values.  Policies that also include LTC riders allow clients to access the death benefit early, which typically is several times the cash value in early retirement.  

While an LTC claim is relatively likely, most claims last less than 2 years and many retirees won’t ever make a claim.  In such a case, unlike a traditional LTC policy that only pays a benefit if and while you qualify, death benefits and cash values remain intact.  This means the policy can be a backstop for overspending or underperformance of other investments, and replace the value of assets via the guaranteed death benefit.

What to look for in a rider:

1. Fully underwritten riders tend to have the greatest benefits.  Many policies come with chronic illness riders at no additional cost, but the company compensates for that with more restricted benefits provisions and adjustments to policy values upon claim.
2. All riders have a “pool” - the portion of the death benefit that can be used for LTC, and a “Maximum Monthly Benefit,” the amount of the pool that can be used monthly.  It is crucial that the maximum monthly benefit either rises over time to combat inflation, or that one starts with a maximum monthly benefit well above today’s costs in the case the company doesn’t offer increases in the benefit.
3. Ask whether the rider counts as section 7702 “qualified” LTC insurance.  These riders tend to have more generous provisions such as care coordination benefits and the potential for tax advantages in the right circumstances, including at the state level in some jurisdictions.
4. Stay away from trust ownership.  While most states will allow trust ownership, if an ILIT has been established to pass benefits outside one’s estate, receiving benefits from an LTC rider is generally viewed by attorneys as an event that could cause death benefit inclusion in one’s estate.  Consult your advanced sales department or estate planning attorneys if this is a concern.

The drawback of the rider is additional cost of roughly 5-15% more than the base policy premium.  But that cost pales in comparison to the potential benefits and is far less than one would pay for standalone LTC insurance with a similar pool available.

Just like a major league relief staff has lefties, righties, closers, and other specialists, a Life/LTC hybrid policy provides options for whatever may befall a retiree, with continued upside potential in the event all goes well.

Knowing that they are protected against all major eventualities in retirement can give a retiree much greater freedom to spend and enjoy that which they’ve spent a lifetime of work to accumulate.